Research on Decentralized Credit and Lending on the Blockchain

Data-backed research into how new smart contracts, digital assets collaterals and P2P marketplaces are disrupting traditional methods of credit and lending.
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What's inside the
Decentralized Credit and Lending on the Blockchain report

PolychainSALTEthLendRipioEverex

Research and key insights on:

Traction and adoption numbers for top players on the blockchain

Top 5 market needs and what end-users care about

Market sizing and sector ranking

Thorough analysis on how Decentralized Credit and Lending on the Blockchain is disruptive

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Decentralized Credit and Lending on the Blockchain Webinar Transcript

This is the on-demand webinar on decentralized credit and lending on the blockchain. Over the next 20 minutes, we’re going to deep dive into why the decentralized credit and lending space matters. We’re then going to define what makes up this sector, what the end users and markets care about, how is decentralization addressing these market needs, what is disruptive about the decentralization thesis, market sizing, and sector ranking, and analysis of the top players on the blockchain, and finally in conclusion, the strengths, weaknesses, opportunities, and threats that face the sector over the coming years.

Hi. I’m Ganesh Swami, and I’m the CEO and co-founder of Covalent. At Covalent, we use data to cut the noise and bring transparency to the crypto market. Crypto today is in a very interesting juncture. Without data, it’s difficult to know what to pay attention to and what to ignore. With our data-backed research, we bring a strategic vantage point to you that has never been done before. This understanding and transparency is critical for mass market adoption of Crypto.
Our research methodology is based on the AUDIT method, an acronym that stands for Actionable Understandable Data-driven In-depth Timely information. To learn more about the AUDIT method, take a look at the accompanying material.

Some of the featured platforms on this webinar are Polymath, SALT, ETHLend, Ripio Credit Network, and Everex. We’re only focused on post-ICO companies, and therefore these companies are actively trading and being used on the blockchain.

The first question you must ask is, “Why pay attention to the decentralized credit and lending space?”

The average person is much more familiar with the equity and stock markets, but the debt markets are much larger. For example, in 2017, about 2.2 trillion of newcorporate bonds were issued. Compare that with slightly under $780 billion in new corporate equity. Despite its massive size, the debt markets are plagued with inefficiencies. The problems with the debt market can be distilled into one or more core points, their liquidity risks, their barriers to interoperability between markets and regions and there is a single point of failure due to their heavy concentration of players that are crucial to market operations.

Next, we look at what defines the decentralized credit and lending space. We define this sector as having four key attributes. First is the peer-to-peer nature of the debt market. Today the debt markets are heavily centralized. This results in the financial risk and loan approval process being concentrated with a few centralized players. A peer-to-peer network of lenders and borrowers diversifies the risk and also enables cross-border loans.

The second attribute is the use of Digital Assets as collateral. Even with the growing adoption of Digital Assets, borrowing against those assets is non-existent in the traditional lending space. In the decentralized version, a borrower can pledge their crypto assets as collateral to borrow a more accepted currency like the US dollar or Euros.

The third attribute is the non-traditional methods of creditworthiness. The credit rating methods of traditional lending players are outdated and cannot be used to model the risk of crypto assets. Many of the decentralized lenders have built their own in-house risk assessment technology to look at the creditworthiness of the collateral pledged for the loan. They have also developed new technology to assess the counterparty risk of the borrower combining with traditional creditworthiness scores like FICO.

The fourth attribute is the use of Smart Contracts. A Smart Contract is like a loan agreement that contains data about the capital, collateral, maturity terms, the parties involved, the creditworthiness and what happens in the case of default.

The Smart Contract runs autonomously on the blockchain without centralized servers and is the reason for the large efficiencies. If the platform demonstrates one or more of these key attributes, we define it as belonging to the decentralized credit and lending space.

The next topic we’re going to explore is what end-users in the market care about. At Covalent we have assessed the lending space according to the five Cs of finance. The five C’s are character, capacity, capital, collateral, and conditions. The lending space caters to two kinds of end-users, the borrowers and the lenders. To address the market needs, the five C’s have to be met in a frictionless manner to both kinds of users.

The third topic we’re going to look at is how decentralization is addressing the five C’s of finance, which are the market needs. Often times, end-users don’t really care about decentralization per se. They care more about how the platforms are fulfilling their needs. Therefore, we rate the decentralized platforms according to the five C’s. For character – excellent. Capacity – excellent. Capital – average. Since that collateral that’s placed are digital assets, they are volatile in nature. Therefore, they can only secure 60% to 70% of the value of the collateral. Collateral – excellent. Conditions – poor.

Decentralized lenders are currently feature poor in terms of prepayment facility or different types of interest rates offerings. As the adoption of decentralized lenders will grow and mature, they will include all types of features available with their centralized rivals.

The next topic we’re going to explore is how these decentralized credit and lending platforms are disruptive. The first is the business model disruption. There are two points here. The first is that the decentralized lending space makes use of digital assets as a collateral. There’s no existing centralized player that allows you to use digital assets as a collateral. Digital assets are rapidly growing in utilization and adoption across the world. Second, these decentralized platforms make use of the smart contracts to enable automation and have major cost savings. Thus, a bigger address for a market and cost savings are disruptive.

The second is a single point of failure. In a traditional lending system, collaterals of all of the loans are held by one single entity which is risky, from a security point of view. Much of the credit crisis of 2008 can be attributed to the centralized nature of debt-backed securities. With decentralized platforms, collaterals are held by different entities, distributing the risks amongst these users.

Third point is data transparency or data provenance. Data provenance can be defined as a process of tracing and recording the origins of data and its movement between databases. Transparency in the lending is of utmost importance. In 2016, a centralized learning platform called Lending Club, had its CEO borrow from online lenders to inflate the company’s volume. These loans were tied to SEC-registered securities, contained misleading information. Not exactly transparent.

Another internal probe found that the company had knowing sold an investor 22 million dollars of loans that the investor did not want.
The fourth point is censorship. Centralized companies dictate both the onboarding as well as the off-boarding of their users on the platform. Furthermore, government regulations dictate the banning of certain kinds of industries like gambling. Crypto assets enable cross-border lending that can offer many advantages to both the borrower and the lender.
The opportunity to diversify their investment portfolio across different countries and even continents is one of the most prominent benefits for lenders.

Borrowers, on the other hand, benefit from the global pool of lenders regardless of where they live or what they’re going to use the funds for.
Our final topic is to conclude with the strength, weaknesses, opportunities, and threats that the sector has in the future. The biggest strengths of the decentralized lending and credit space are 1) it offers a high rate of return to lenders, 2) it offers a competitive rate for borrowers and 3) it has the option of having geographic diversity.

The weaknesses? 1) There’s a lack of awareness with these platforms, 2) some platforms are limited to one type of lending form like crypto to fiat only. 3) Right now it can only cater to small business size credit.
The opportunities? 1) Transparency and efficiency due to the use of smart contracts, 2) superior screening technology of borrowers, 3) digital assets especially the tokenization of real-world assets on the blockchain are here to stay and rapidly growing.

The threats? 1) The websites dealing with cryptocurrencies are prime targets for hacking. 2) The crypto back collaterals can experience high volatility at times and this is a risk for the lender on the platform.

Thank you for watching Covalent’s webinar, we have data-backed research reports on a variety of different sectors like decentralized cloud computing, file storage, sports betting and gambling, currency exchanges, e-commerce, privacy and security and decentralized social media.

Feel free to reach out if you have any questions, hope to see you around.